Capital allowances enable businesses to claim tax relief on money invested in assets like machinery, equipment, or certain vehicles used commercially.
There are a variety of capital allowances available, including:
- Full Expensing
- Annual Investment Allowance
- Writing-Down Allowances
The allowance that your business is eligible for depends on what you buy, how much you invest, and how your business is structured.
Full Expensing
Full Expensing allows companies to deduct 100 per cent of the cost of qualifying plant and machinery assets from taxable profits in the year of purchase.
This applies to new assets only and is available to limited companies subject to Corporation Tax.
It is an ideal option if you are looking for immediate relief or using the investment to improve cash flow.
Annual Investment Allowance
The Annual Investment Allowance (AIA) offers a similar benefit but is more widely available to sole traders, partnerships, and limited companies.
This allowance allows for 100 per cent relief on qualifying expenditure up to £1 million per year.
Unlike Full Expensing, AIA can apply to both new and used assets, though exclusions apply to assets such as leased items.
Writing-Down Allowances
Writing-Down Allowances (WDAs) apply to any qualifying expenditure that exceeds the AIA threshold or to assets that are not eligible for Full Expensing.
These allowances provide tax relief over several years, typically at a rate of relief against profits of 18 per cent for main pool items and six per cent for special rate pool items, such as integral features or solar panels.
How to claim capital allowances
Capital allowances must be claimed within your tax return and can be set against the taxable profits of your business. Eligible items must be used in your business, not for personal use.
There are additional schemes, such as Enhanced Capital Allowances, which can be used for “eco” investments, which may also be useful to certain businesses.
